Does Institutional Ownership Promote the Transformation of Underperforming Firms?

Grigori Erenburg (), Janet Smith and Richard Smith
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Grigori Erenburg: Department of Economics, Business, and Math, King’s University College at the University of Western Ontario, London, Ontario, Canada
Richard Smith: Anderson Graduate School of Management, University of California Riverside, Riverside, California, USA

Quarterly Journal of Finance (QJF), 2015, vol. 05, issue 04, 1-40

Abstract: We focus on firms that chronically underperform and evaluate ways that institutional investors can facilitate asset redeployment. Increases in institutional holdings are associated with subsequent acquisition and decreases are associated with subsequent failure. For surviving underperformers, holdings and changes are associated with improved performance, but long-run abnormal returns remain negative and Q remains low. This association between holdings and performance is not causal. Rather, it is explained by “flight to quality” combined with persistence of financial performance, including persistence of abnormal returns for underperformers. The evidence casts doubt on interpretations in previous findings of positive relationships between holdings and performance.

Keywords: Institutional investors; monitoring; corporate governance; underperforming firms; acquisition; bankruptcy; distressed firms (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S2010139215500196

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